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Downstream mergers in a vertically differentiated unionized oligopoly

  • Borja Mesa Sánchez

    ()

    (Dpto. Fundamentos del Análisis Económico)

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    In the context of an international unionized oligopoly, with vertical differentiation and downstream and upstream firms locked in a bilateral monopoly, the pattern of downstream mergers is investigated. In such a setting, a downstream merger leads to a reduction in the price of the inputs. Such reduction is greater the more homogeneous the participants’ products are. However, it turns out that most of the market structure equilibria consist of mergers among differentiated producers. I find that firms’ strategic behaviour impedes mergers between similar producers, avoiding that input prices fall to their marginal costs. Given that firms can be harmed by rivals’ mergers, through the important reduction in input prices that those trigger, an scenario of preemptive mergers emerges. A brief social welfare analysis is also presented. It is shown that the market structure outcome is never socially optimal, neither in terms of consumer surplus nor social welfare. Nevertheless, the optimum could be achieved if antitrust authorities block some strategic mergers, precisely those involving more than two firms.

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2010-31.pdf
    File Function: Fisrt version / Primera version, 2010
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    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2010-31.

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    Length: 40 pages
    Date of creation: Oct 2010
    Date of revision:
    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasad:2010-31
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    1. Horn, Henrik & Persson, Lars, 1996. "Endogenous Mergers in Concentrated Markets," CEPR Discussion Papers 1544, C.E.P.R. Discussion Papers.
    2. Nilssen, T. & Sorgard, L., 1995. "Sequential Horizontal Mergers," Memorandum 30/1995, Oslo University, Department of Economics.
    3. Sonia Oreffice & Climent Quintana, 2009. "Anthropometry and Socioeconomics in the Couple: Evidence from the PSID," Working Papers 2009-22, FEDEA.
    4. Luis J. Hall, 2010. "Differentiated social interactions in the US schooling race gap," Working Papers. Serie AD 2010-17, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    5. Steven Berry & Joel Waldfogel, 2003. "Product Quality and Market Size," NBER Working Papers 9675, National Bureau of Economic Research, Inc.
    6. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
    7. Klaus Gugler & Dennis C. Mueller & B. Burcin Yurtoglu & Christine Zulehner, 2001. "The Effects of Mergers: An International Comparison," CIG Working Papers FS IV 01-21, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    8. Scarpa, Carlo, 1998. "Minimum quality standards with more than two firms1," International Journal of Industrial Organization, Elsevier, vol. 16(5), pages 665-676, September.
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